More than 90% of the profit was with less than 20% of customers.
Strategex helped a major wholesale distributor deploy 80/20. We worked with the organization to institutionalize a change in their culture which was firmly lodged in the mentality of “top line at all costs.” At the onset of our engagement, the company was achieving sales growth but not realizing any incremental profitability. To attain financial results, we needed to educate and motivate the full company—leadership and the "rank and file"—to operate and think in an entirely different way...not because they had to, but because they saw the benefit of the methodology and wanted to do so.
BACKGROUND
Like many distribution companies, the company was heavily top-line focused and operated under the premise that "every order was a good order." Revenue was increasing but profit was stagnant. Product line proliferation was rampant, the customer base numbered in the thousands, and the resulting complexity led to an overhead structure that the business simply could not support.
The Problem
We sought to understand the company's flat profitability. Our initial analysis revealed thousands of customers but the bulk of profit was generated by less than 20% of customers. The same was true for product lines. Their operational complexity was driven by excess suppliers, out-of-control product line proliferation, and costly overhead to support underperforming customers and products.
The client had 100,000 SKUs and corresponding complexity/overhead.
They had 45 branches with a widely dispersed inventory that bred inefficency.
80/20 analytics empowered the team to focus on the true value drivers of the business. We strategically eliminated the factors and initiatives that were sub-optimizing profitability. Then, we reallocated resources to areas with better profit potential.
80/20 Process
The objective, as is always the case with Strategex 80/20 efforts, was to make this a “total company” knowledge transfer process. Our goal was to work with the team to gain adoption, correct the company's course and teach the team the 80/20 tools and techniques to continue to grow. Over 500 of the company’s associates were trained directly by Strategex, exactly as management had been trained.
As for the strategic changes, we started with customer strategies. First, the customers were segmented into three distinct strata—very large existing customers ("80s") very large potential customers (targets), and small customers buying only standard items (transactional "20s"). The company dedicated a select team of top performers in all disciplines to manage and grow the top accounts. Transactional "20s" were handled via e-commerce and inside sales—no outside sales resources were dedicated to these customers.
At the onset of the engagement, the company had 45 branches with a widely dispersed inventory. This had a negative impact on working capital, efficiency, and customer experience. The team consolidated 80% of the inventory into five regional distribution centers.
In-depth training: Total company transfer of knowledge
Customer segmentation & stratified strategies
Product line simplification
Inventory & Overhead Reallocation/Reduction
Target selling programs
Compensation restructuring to reward profitable growth
The Impact of 80/20 Profit & Growth
GROWTH FROM TARGET ACCOUNTS
By focusing on target selling, the client achieved accelerated growth. Their target selling team was able to win several major target accounts—resulting in 35% top-line growth from under 10 new customers.
COST REDUCTION
Costs plummeted due to the strategic simplification of the customer and product base. This enabled them to eliminate a third of their warehouse space, consolidate distribution centers, and trim underperformers.
The Bottom Line
80/20 enabled significant operating income and working capital improvements. In less than a year, EBITDA increased by 20%.
RESULTS
The effects of 80/20 were dramatic and far-reaching. First, profitable market share growth accelerated dramatically when they won strategic target accounts. Costs plummeted due to the vast simplification of the customer and product base. Transactions were cut sharply and cash flow increased. These efforts were helped immeasurably by converting small accounts from “account” status to “transactional” status. Vendor consolidation progressed rapidly, new product introductions occurred more quickly and much more effectively…the ROI was extreme.
In the end, the client fully embraced the work, and the culture was transformed completely. Excellent financial results provided momentum for change; operating income for the entire business increased by over 400 basis points.
Eventually, the model spread to other segments of the holding company, with similar success.
80/20 continues to be a “force multiplier” in driving organizational alignment with a hyper-focus on what matters most. Our team is less stressed, more focused, more productive, and having a lot more fun. 80/20 is the gift that keeps giving to all our stakeholders.
